November 12, 2014

Big bank approval rates for small business loans drop

U.S.--Small business loan approval rates at big banks dropped for the first time in seven months, according to the October ‘Biz2Credit Small Business Lending Index’’. Small business loan approval rates at banks with $10 billion+ in assets dipped to 20.4 per cent in October from 20.6 per cent in September.

“Big banks have demonstrated their commitment to small business owners over the last year. However, institutional lenders are moving into the marketplace and attracting high quality borrowers,” says Biz2Credit CEO Rohit Arora, who oversaw the research. “Despite the small drop in approval percentages, big bank financing of small businesses is up nearly 20 per cent in comparison to last November when the economy was reeling from the government shutdown. With improving economic conditions, entrepreneurs have shown willingness to invest in their firms more this year than in any other since the Great Recession of 2009 to 2011.”

The percentage of loans granted by small banks slipped for the fifth consecutive month to 50.2 per cent from 50.3 per cent last month. Yet they still continue to approve more than half of the loan requests they receive.

"Some smaller banks are paying the price for being slow to accept online applications," Arora says. "The increased competition from big banks and institutional lenders are hurting them because borrowers are going to these competitors instead of small banks."

Meanwhile, institutional lenders granted 59.7 per cent of the funding requests they received in October, a slight increase from 59.5 per cent in September. Approval rates by institutional lenders have increased every month since Biz2Credit began monitoring this category of lenders in January 2014.

"Small business lending is becoming mainstream among institutional players, who are offering more long-term products. They look to be a long-term threat for banks in the small business lending space," Arora explains. "Big banks long had the advantage of a vast distribution network, the branches, which are now fading away. Also, immigrants are not as impressed by the brand names of big banks. That's an advantage they long held."

"People are seeking to do capital investments and are looking for money and shopping around. You can easily shop online and get longer terms,” explains Arora, one of the nation’s leading experts in small business lending.

At the same time, approval rates at alternative lenders -- merchant cash advance companies, factors, and other non-bank institutions -- slipped for the ninth consecutive month to 62.1 per cent in October, from 62.6 per cent in September. Credit unions granted 43.5 per cent of loan applications in October, a slight rise over the approval rate of 43.4 per cent last month. However, a year-to-year comparison shows that lending approval rates at credit unions are down as they continue to be an afterthought by small business loan applicants.